Inter-Corporate Loans & Investments — Section 186

Section 186 of the Companies Act 2013 governs inter-corporate loans, investments, guarantees, and securities. Under Section 186(2), a company cannot directly or indirectly give a loan, guarantee, or security exceeding 60% of its paid-up share capital plus free reserves plus securities premium, or 100% of its free reserves plus securities premium, whichever is higher, without prior approval by special resolution in a general meeting. Loans beyond this limit require prior special resolution and the rate of interest must not be lower than the prevailing yield of one, three, five, or ten-year Government Security closest to the tenor of the loan under Section 186(7). Section 186(4) requires disclosure of all such loans in the financial statements.

Under Section 186(7) of the Companies Act 2013, any loan by a company to another body corporate must carry interest at a rate not lower than the prevailing yield of the relevant Government of India Security. Interest-free loans are not permitted except in two specific scenarios: (a) the loan is given by a holding company to its wholly-owned subsidiary or by the company to a joint venture (Section 186(11)(a)) — such loans are exempt from the interest floor and from Section 186 limits entirely; or (b) the company is a banking or insurance company exempt under Section 186(11). If your subsidiary is not wholly-owned (even 1% is held by another person), you cannot give an interest-free loan and must charge the prevailing G-Sec yield rate. The exemption under Section 186(11)(a) requires a board resolution and disclosure in the annual report.

For domestic inter-corporate loans between related parties, Section 40A(2) of the Income-tax Act 1961 empowers the Assessing Officer to disallow the interest expenditure claimed by the borrowing company if the interest rate is excessive or unreasonable compared to market rates. From the lending company's perspective, if the loan is interest-free to a non-WOS entity, the income tax department may invoke Section 28(iv) or Section 2(24)(x) to tax a notional benefit. Under Section 92B, if both companies are associated enterprises (as defined under Section 92A), the loan is an 'international transaction' only if one party is non-resident; for purely domestic associated enterprises, Sections 92 to 92F do not apply but the specific domestic transfer pricing rules under Section 92BA (which covers specified domestic transactions above ₹20 crore) may require arm's length pricing and Form 3CEB certification by a CA.

An Indian company lending to its overseas subsidiary is classified as an Overseas Direct Investment (ODI) under the Foreign Exchange Management (Overseas Investment) Rules 2022 and the Foreign Exchange Management (Overseas Investment) Regulations 2022. Loans to an overseas subsidiary (a direct investment entity) are permitted under Rule 19 of the OI Rules 2022, subject to the financial commitment limit of 400% of the net worth of the Indian entity as per the last audited balance sheet. The loan must be in foreign currency or INR, at an interest rate not lower than the prevailing market rate, and must be reported in Form ODI-Part II with the authorised dealer bank within 30 days of each remittance. If the overseas entity is not a subsidiary but a third party, the loan is governed by FEMA Notification No. 4(R)/2018 and requires specific RBI approval.

Under Rule 2(1)(c)(xiii) of the Companies (Acceptance of Deposits) Rules 2014, an amount received by a company from another company is excluded from the definition of 'deposit' — meaning inter-corporate loans are not regulated as deposits, and the deposit acceptance limits, rate caps, and Form DPT-3 filing requirements do not apply to them. However, this exclusion applies only if both entities are companies registered under the Companies Act 2013 or 1956. Loans from LLPs, trusts, or individuals (including promoters, unless specifically exempted) may be classified as deposits. Companies must file Form DPT-3 annually by June 30 to report amounts received that are not deposits, which includes inter-corporate borrowings, ensuring transparency under the Deposit Rules.